Mon, Oct. 13, 2003

Valuation of Intellectual Property

JN - Recklinghausen.   Regardless of dot-com bubbles and internet hypes, Intellectual Property often is one of the most valuable corporate assets. For instance, Business Week estimates the current monetary value of the Coca-Cola brand at US$70.45 billion, representing up to 70% of the total market capitalization of the company. For small and medium enterprises the valuation of IP assets is also important, as the World Intellectual Property Organization (WIPO) points out. Win-win situations in licensing negotiations, M&A or securization require proper knowledge of the true value of a company's assets, including the tangibles and intangibles.

For example, a company should know the value of its IP before entering into a reasonable licensing agreement. But some 75% of Fortune 500 companies admitted in a recent survey that they do not assign a value to their IP in their annual reports. In large part, this results from their difficulties in valuing intangible assets.

Several approaches based on common methods of valuating tangible property lend themselves to IP valuations. The income approach considers the income an IP asset could generate through its economic life, for instance by estimating the amount of money the company saves by not having to obtain a license from another party. The market approach compares the value of similar IP as determined by actual sales of intellectual property assets. This approach is more limited because it requires a public market to compare such assets. More recent valuation approaches treat IP, in particular patents, like transactions involving options in capital markets. Similar to options, patents also contain a right, but no obligation, to make use of an innovation in a given period of time. Most option-based valuation methods derive from the Black-Scholes options pricing model.

In general, these methods apply as well in Germany. However, German accounting regulations do not permit the treatment of intangibles as assets unless the intellectual property has been purchased.

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